Weekly technical analysis chart pack 9 nd June 2014 James Brodie Chartered Market Technician

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1 Weekly technical analysis chart pack 9 nd June 2014 James Brodie Chartered Market Technician EURUSD Within 24 hours of Mario Draghi announcing the ECB s new round of rate cuts and easing policies the EURUSD went from the largest volume spike in over a year, to new multi year low in implied volatility. However, as the second chart shows there has been a clear divergence between the respective EURO area and U.S. 2 year interest rate differentials favouring the US dollar. A break of the key level will confirm a top is in place, with new lower highs and lower lows heralding a new longer term downtrend. The medium term rising wedge is typically a bearish chart formation, again, a break of is key. USDJPY With volatility at such low levels the USDJPY average true range is now back to levels not seen since pre Abenomics. Friday s payroll had the opportunity to upset the market but instead come out dead-on expectations at +217k has seen the currency trade in a converging range, a descending triangle. Key resistance comes in at from a 16 year resistance line, while support lies at A break of one of these two trend lines will hail the start of a new medium term trend. GBPUSD While the medium term trend in GBPUSD is still higher there are now warning lights flashing. The short term trend is now lower, the 1 month trend channel having successive lower highs and lower lows needs to break to resume the longer term trend higher, while a break below the double bottom will confirm a top is in place. AUDUSD both the long term and medium term trends are lower but for the last 2 months the AUDUSD has been caught in a sideways range. Volatility will be expected to spike on Thursdays employment report, with a break above or below the key to the next medium term trend. NZDUSD the focus in NZDUSD this week will be on the Reserve Bank s monetary policy decision and subsequent statement on Thursday. The curve prices 80 basis points of hikes

2 over the next 12 months and a 90% chance a 25bp hike this week, by far the most aggressive G10 central bank. Key resistance is at and support at AUDNZD This is a key week for the AUDNZD cross, with Thursday holding both Australian employment report and the Reserve bank of New Zealand s monetary policy meeting. Although AUDNZD based in January 2014 at and in the last 20 years has based multiple times between 1.05 and (2005) levels, the recent move higher in the cross has yet to be confirmed by the respective interest rate differentials. AUDNZD vs 2 year interest rate differentials the 2014 grind higher in the currency cross has yet to be confirmed by the respective 2 year interest rate differentials which continue to sit at a multi year lows. Thursday s data will be key. EURJPY with ultra easy monetary policy from both the BOJ and the ECB, the EURJPY cross will take its direction largely from the Nikkei equity index. The two are highly correlated and although the short term direction of the cross is lower the level needs to break to confirm a longer term down trend. Above and the long term Abenomics uptrend will be back in play. Eurodollar Interest rate futures September 2015 (EDU5) The market continues to focus on the front of the yield curve and pre-empt the first hike in rates by the U.S. Federal Reserve. The June 2015 FOMC meeting currently has 6 basis points of hikes priced in by the market, and the September month futures contract (EDU5) currently sits just above a 3 year support line. A break below accompanied with stronger data or central bank rhetoric, will see the market beginning to price a more aggressive tightening policy.

3 EURUSD EURUSD volume on Thursday 6 th June, the day of the much anticipated ECB meeting was the largest in over 1 year. However within 24 hours the markets expected 30 day volatility was back at decade lows. This correlates highly with equity volatility (S&P) which is also down at low levels not seen since early So what will move the currency? Clearly the ECB have embarked on a new round of easing and have clearly stated rates will remain lower for longer, so it is the U.S. yield curve that will direct the trends. The chart below shows clearly the recent divergence in the respective 2 year interest rates which strengthens the case for US dollar buying (EURUSD selling), so while the medium term trend grinds higher it will require a break of the key level to confirm a top is in place trend line (wedge) resistance top April 2014 low, June 2014 high day moving average congestion support line **double bottom and 2014 low** Trend line support Double bottom and 2013 low low Multi-year low

4 EURUSD vs 2 year interest rate differentials While the EURUSD has risen from to over the last two years the difference between the respective EUR and USD 2 year interest rates is now diverging aggressively as Mario Draghi and the ECB announce their new round of rate cuts and easing policies. While the Federal Reserve looks committed to keep tapering from their Quantative Easing policy it will be the U.S. yields that will be the key driver of the EURUSD currency. The U.S. overnight index swap (OIS) which prices Central Bank interest rate movements now implies 6 basis points of hikes by the Federal Reserve at the June 2015 meeting, confirmed by CME Eurodollar futures which are now trending lower. EUR 2 year interest rate yields minus the US 2 year interest rate yields has moved from +12 basis points to -20 in the last 6 months while the currency is back to largely unchanged levels. The divergence in these respective yields should weigh heavily on the EURUSD in the medium term.

5 USDDJPY While U.S. equity implied volatility is back at levels not seen since 2007, so USDJPY volatility as measure by the average true range is back to its lowest levels since September 2012, pre Abenomics has seen the currency trade in an ever narrowing range, a descending triangle. The support and resistance levels from this triangle lie at and Above here the key resistance level is , the cycle high, double top from 1 st January 2014, and resistance from 16 year trend line. While a close below the level would confirm a top is in place and target in the medium term **Cycle high, double top and 16 year resistance line** April 2014 short term peak Triangle resistance line Ichimoku cloud chart resistance Long term support/resistance line horizontal support/resistance line day moving average **double bottom** June 2013 low and 38.2% Fibonacci retracement level

6 GBPUSD While the medium term trend in GBPUSD is still higher there are now warning lights flashing. The short term trend is now lower, the 1 month trend channel having successive lower highs and lower lows needs to break to resume the longer term trend higher, while a break below the double bottom will confirm a top is in place. As the market looks for the first hike by the Bank of England any weakness is upcoming data will weigh heavily on the currency % Fibonacci retracement level from 2007 peak to 2009 low peak high short term trend channel top trend channel resistance double bottom swing low day moving average low and long term support/resistance level low and double bottom

7 AUDUSD Although the long term and medium term trend in AUDUSD is lower, the currency has been in a sideways range for 2 months now. The price action is currently testing the upper resistance line of a 1 year trend channel, while the key support level is at and has held multiple times. The key data this week is Thursday s employment report, a break of resistance or support should herald the start of a new medium term trend Multiple top Swing high peak Medium term trend channel resistance Triple bottow day moving average Rising neckline support low and cycle low

8 NZDUSD The NZDUSD is trying to bounce after its recent sell-off, but the main focus this week will be on Thursday s Reserve Bank of New Zealand monetary policy meeting. The yield curve is pricing 80 basis points of hikes by the central bank over the next 12 months, by far the most aggressive G10 central bank, and a 90% chance of a 25bp hike this week. As this is largely priced by the market the key will be the reaction to RBNZ Governor Wheeler s statement after the rate decision peak **2014 peak** Short term resistance level April double bottom **June 2014 low** day moving average low Quadruple bottom

9 AUDNZD This is a key week for the AUDNZD cross, with Thursday holding both the Australian employment report and the Reserve bank of New Zealand s monetary policy meeting. Although AUDNZD based in January 2014 at and in the last 20 years has based multiple times between 1.05 and (2005) levels, the recent move higher in the cross has yet to be confirmed by the respective interest rate differentials (see below chart) Long term resistance line Long term Fibonacci retracement level Cycle high day moving average Triple top support Trend line support Short term low low Multi-year low.

10 AUDNZD vs 2 year interest rate differentials Although the AUDNZD cross has turned higher from the low the respective interest rates have yet to confirm this new uptrend. The current rate differential is caught in a range of -120 to -108 basis points, and a convergence back towards parity is required to support the AUDNZD move higher. Thursdays RBNZ monetary policy meeting and Australian employment report will be key.

11 EURJPY EURJPY continues to trade in a sideways triangle formation. As the range converges and both central banks are in easing mode the key driver of this cross will be the Nikkei Equity Index, which shows a high correlation to the currency. A break of resistance or support will likely see an aggressive move as traders jump on the breakout of the converging range **Cycle high** Triple top Trend line resistance Trendline resistance day moving average **Double bottom support** low Double bottom

12 Eurodollar interest rate futures SEP 2015 contract (EDU5) As the U.S. Federal reserve continues to taper the market is increasingly focusing on the front of the yield curve to identify the timing of the first 25bp rate hike. The yield curve will be critical in the months ahead with so many asset classes dependent on it; FX, equities, commodities, housing and of course emerging markets. The market is currently pricing 6 basis points of hikes into the June 2015 meeting. Eurodollar futures sold off on Friday night after the US non-farm payroll data and if data continues to improve and the 3 year support line can be broken (currently 99.27) then the market will quickly re-price a more aggressive FED in % and 3.05% continue to be the key resistance levels in the US 10 year government bond yield. A break above here we see a rapid rise in yields to 4.00% Double top and all time high Friday payroll peak Previous triple top year support line May low Triple bottom low Taper tantrum low

13 James Brodie C.M.T. CIO, The Sherpa Funds Board member, Market Technicians Association (1 st July 2014) Twitter: jamesrbrodie The views and opinions expressed in this report reflect the personal observations and views of individual Sherpa Funds traders which may differ from or be inconsistent with proprietary positions of The Sherpa Funds. Traders at The Sherpa Funds may have taken trading positions for The Sherpa Funds in any currencies or securities mentioned herein in advance of disseminating these views and opinions. This report is for information only and is not a specific offer or solicitation to buy or sell. Historic performance is not indicative of future returns. Facts and data provided are from sources the trader believes to be reliable, but neither the trader nor The Sherpa Funds can guarantee they are complete or accurate. The Sherpa Funds will not be liable for any damages or losses in any way related to this report. The Sherpa Funds is regulated by the Monetary Authority of Singapore under Singaporean laws. All charts sourced from Bloomberg.